'Not Doing Enough': Jonathan F.P. Rose, Scott J. Alter On Affordable Housing Construction, Investment

The promise to expand affordable housing was a core tenet of many local and state elections last month. In the nation’s biggest city, Mayor-elect Zohran Mamdani campaigned on the pledge to create more than 200,000 new affordable housing units over the next 10 years — an estimated $100B commitment. 

But can he deliver on this promise for New Yorkers? 

From the stage at AHF Live in Chicago, site of this week’s Walker Webcast, Jonathan F.P. Rose, founder and president of the Jonathan Rose Cos., told host and Walker & Dunlop CEO Willy Walker that Mamdani doesn’t appear to understand the affordable housing industry — but to be fair, many politicians don’t. Rose added that Mamdani appears to be making good appointments, however.

“There will be a year of learning,” Rose said. “I hope he's a good learner.”

Scott J. Alter, co-founder and principal of Standard Communities, said “it’s pretty clear” that Mamdani has no idea what’s going on with affordable housing. 

To take it even further, many of Mamdani’s talking points regarding this subject are things he can’t control, Alter said. 

“The state and the governor handle a lot of the policy that is creating the problems we have in the city,” he said. “He does have state legislature experience, but when you look at what he wants to do, it really goes in the face of what he says is going to be better for the people.”

The New York-based Jonathan Rose Cos. and Standard Communities have multibillion-dollar portfolios, owning and managing thousands of affordable housing units, making them some of the biggest players in this space. 

Beyond New York, there is no single best answer for where to invest next, Rose and Alter said. Each region comes with its own peculiarities.

Rose said his firm conducts a multifactor assessment when choosing its next investment. These factors include insurance costs, climate and liability risk, public policy and job growth.

“We're looking at all those factors to try and figure out where to buy,” he said. “We're currently in 16 states, but the proportion that we're in those [states] varies. For example, in New York City, we still think it makes sense to do project-based Section 8 deals, but I'm not sure it makes sense right now to be doing tax credit deals.”

The markets that aren’t piquing Rose’s interest include Southwestern cities such as Albuquerque, New Mexico, and Phoenix because of their extreme climate and lack of water. Rose also said Texas and Florida don't interest him — shocking Walker.

“We've never invested in Texas and Florida,” Rose said. “Texans and Floridians did very well selling to New Yorkers. They've been, in the past, cyclical markets, and I try to avoid cyclical markets.”

Alter said the affordable housing sector has grown exponentially over the past 40 years due to the 1986 Tax Reform Act, which created the low-income housing tax credit, or LIHTC. What was once a small subsector of multifamily has matured into its own industry, similar to student or manufactured housing. 

Standard Communities has seen a big opportunity in buying portfolios from early adopters of the tax credit who, after a few generations, have started to age out without proper succession plans. As for which particular locations or regions the firm is looking to invest in, North and South Carolina, Florida, California and major gateway cities are on the top of Alter’s list. 

“We're buying portfolios that are fee simple, general partnership interests,” Alter said. “There's some heavily structured products that we're buying into, and we're also looking very much at the growth dynamics in the markets of the portfolios that we're buying. We're just looking one by one, seeing what the opportunities are.”

Walker said that since the introduction of LIHTC, the federal government sets aside roughly $12B to $14B in annual tax revenue in exchange for between 70,000 and 90,000 affordable units. In total, this adds up to about 3.7 million affordable housing units developed since the start of the program. But is the federal government doing all it can? 

Rose said it absolutely isn’t. 

“In the affordable world, we're not doing enough. In the first-time homebuyer world, we're not doing enough,” he said. “There are many sectors in which the housing world is behind the demographic and life cycle demand in the U.S.”

The good news is there is tremendous bipartisan support for more housing, Rose said. 

“Where I think we’re now lacking is innovative vision,” he said. “The local housing tax credit was conceived of by Jim Rouse and a few other people, and nobody thought of such a thing before. We need to think of a bunch of things that we haven't thought of before. They can dramatically scale up housing access in the U.S.”

He added that there is a lot of talk about zoning requirements in relation to this issue. If local municipalities can free up more zoning and more density, that would unlock more opportunities to build more efficiently and effectively. 

Financing, Rose said, is another essential area that must be addressed. 

“We can solve it,” he said. “We can build a lot more housing with 2% or 3% money than we can with 6% money. I think this is something, again, where the federal government can step in and make these resources available.”

Alter said Standard is constantly accessing financing structures that aren’t from Fannie Mae, Freddie Mac or the Department of Housing and Urban Development. He is seeing more insurance capital and public finance markets pair well with affordable housing.

“There's so much you can do with affordable housing that I think doesn't get fully accessed,” Alter said.

While Fannie, Freddie and HUD are doing what they can, Alter said, they could think more outside the box and start to work closely with insurance companies. This may help to bring down the cost of capital.

“Affordable housing is really bondlike, so you can just splice out the cash flows and try to figure out ways to finance it in more creative ways, and that's really worked well for us,” Alter said.

The cost of building affordable housing must change, Rose said. The processing time for HUD’s Section 221(d)(4) loan, what Rose described as a “fantastic loan,” is far too slow and should match the speed of “everybody else.” The Davis-Bacon Act, which sets the minimum wage requirements for workers on federally funded projects, also significantly raises construction costs and imposes heavy compliance burdens that discourage contractors from participating. 

“It's very, very burdensome, Davis-Bacon reporting,” Rose said. “If we could unleash that product with some modifications, this probably is the administration that could do it.”

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This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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